Current account is bleeding

Current account has posted a deficit of $1.6 billion in May 2017 alone which is almost half of the full FY16 deficit. It is also the highest monthly deficit since October 2008. It is official, current account is bleeding. At 11MFY17, it is touching $9 billion (3.2% of GDP), up by 178 percent year on year.

External account worries heightened in the second half as during Jan-May17, deficit stood at $5.4 billion as against $3.7 billion in the first half. Authorities were expecting current account deficit to tame down in the fourth quarter on the premises of CSF payment, increase in exports due to PM package, curb in imports due to 100 percent cash margins for non-essential imports, and higher seasonal remittances flow.

Some are yielding results such as a marginal pick up in remittances and exports; but there is no respite to import growth whilst seeing the hardening US stance on Pakistan, CSF seems like history. The net impact is negative.

The government targeted CAD for FY17 at 1.5 percent which is less than half of the likely number. A couple of months back, the SBP revised its CAD forecast up to 1-2 percent of GDP; while IMF in its recent release estimated it at 3 percent of GDP. The actual outcome, save a miracle in June, would be around 3.1-3.2 percent of GDP or $10 billion.

One of the slippage is the absence of CSF flow which was estimated around $700 million in the last quarter; but nothing is coming especially after the recent hardening stance of White House on lack of support on war against terror.

Exports picked up a bit to $1.94 billion in May; the average monthly exports stand at $1.92 billion in Mar-May verses 1.76 billion in Jul-Feb. The impact of PM package is nothing more than $150-200 million per month. That is peanuts, seeing the jump in imports. The need is to release refunds of cash strapped exporters. But Dar seems to be focused solely on generating more tax revenues.

The idea is to curb fiscal deficit on the face of it, and borrow externally for maintaining reserves. But that is not sustainable amid the burgeoning current account deficit, foreign debt is becoming hard to acquire.

The elephant in the room is the import bill which increased to all time high of $4.6 billion in May17. The enhanced margins and falling oil prices have no impact whatsoever on imports. Oil prices have slid by over 20 percent since January, but petroleum imports are going up. The reason is simple; higher the economy grows, higher are the imports. And the relationship is not there for exports as latter are falling despite a 10 year high growth in FY17.

Economic growth is projected even higher in FY18; and all the economic expansion is to cater domestic demand, be it by government or private sector. Energy and other infrastructure require one time machinery imports which is happening now and subsequently would need fuel imports to be run.

On the flipside, there is absolutely no focus either from the government or private sector to enhance exports. The trade gap may expand more from current $22.6 billion, which is up by 40 percent in 11MFY17. The gap is $30 billion according to the PBS data. There is an additional $5 billion adjustment required in SBP data for CPEC related imports and the central bank should incorporate that in its numbers. Once that happens, current account deficit would increase by the same amount. The counter entry will come in FDI and external debt while reserves will remain unchanged.

Remittances are no longer the savior either. Although, the flow increased by 21 percent in May from April; the yearly fall is 2 percent. Remittances growth would not even be close to trade deficit pace.

What are the revenue avenues in capital and financial accounts to halt falling trend of reserves? In FDI, the base is too small as it is covering one-fifth of CAD in FY17. Nothing to talk about portfolio investment. In financial account, the flows are from donors, and lenders. It's too much to cover 80 percent of CAD.